What a difference a year can make. Since our budget summary 12 months ago, we have had a change in Prime Minister, a federal election, the resources super profits tax was scrapped, a carbon tax was announced, a new NSW state government was elected, there were several natural disasters in our region, the US government finally got Osama Bin Laden and there was a royal wedding!
We were warned that this would be a tough budget to get us back on the road to surplus as the economic effects of the GFC subside and our economy strengthens off the back of what the treasurer refers to as the ‘Mining Boom Mark II’. The final result however is more of a nip and tuck budget rather than a major slash and burn.
The government has targeted high income earners and will reduce ‘middle class welfare’ payments, such as the Family Tax Benefit and the Baby Bonus, by $2 billion. Rather than take current benefits away, the government has chosen to freeze income tests from being indexed each year so as wages naturally grow, fewer people will become entitled to benefits.
The other major group targeted are welfare recipients with the extension of the earn-or learn requirements to 21 year olds, re-structuring single parent payments and introducing a new set of work tests for people under 35 on Disability Support Pensions.
This is also the first budget in eight years not to deliver a personal income tax cut.
New spending initiatives were announced in the areas of regional health care, skills & training and mental health.
The focus on returning to surplus so quickly is economically sound though heavily politically driven and the treasurer will be banking on a strong performance by the resources sector and no major interruptions to the economy during the next twelve months to deliver this promised surplus.
There was also no mention of the carbon tax in this budget, which is appropriate given that the policy has yet to be finalised and costed, though will be certain to raise significant political debate.
While there have been no wholesale changes to our taxation and superannuation systems, several specific changes were announced which may affect you. These changes are detailed below.
The budget at a glance
• Total expected government revenue of $342.4 billion during the 2011-12 financial year, up from $303.7 billion in 2010-2011.
• Total expected government expenditure of 349.7 billion during the 2011-12 financial year, up from $336.9 billion in 2010-2011.
• A net budget deficit of $49.4 billion or 3.6% of GDP for the 2010-2011 financial year
• A net budget deficit of $22.6 billion or 1.4% of GDP for the 2011-2012 financial year
• An expected budget surplus of $3.5 billion in 2012-13 financial year
• Expected national unemployment rate of 4.75%
• Expected economic growth of 4%
• Expected inflation rate of 2.75%
• Total expected government debt of $82.4 billion by 30 June 2011. Government debt expected to peak at $106.6 billion during the 2011-12 financial year.
• Investment by the mining sector is expected to be a record $76 billion during the 2011-12 financial year, which is more than the rest of the private sector combined.
• Spending aimed to address the challenges of a ‘patchwork’ economy whereby different sectors and locations will experience different rates of growth.
Tax Changes – Individuals
The ‘Flood and Cyclone Reconstruction Levy’ will apply from 1 July 2011. A 0.5% levy will apply to individuals with taxable income of between $50,001 and $100,000 and a 1% levy will apply to taxable income above $100,000. This levy is expected to raise $1.7 billion.
The dependant spouse offset will be phased out from 1 July 2011 for taxpayers with a dependant spouse aged 40 years or less without dependant children. The maximum rebate was previously worth up to $2,243 for eligible recipients.
Minors will not be able to access the low income tax offset on unearned income. This will mainly affect discretionary family trusts who distribute taxable income to children and grandchildren by reducing, though not eliminating, the amount of tax free income distributable to minors.
In response to the recent Anstis case in the High Court where a student taxpayer successfully claimed self education deductions against her Youth Allowance, the Government will amend the tax legislation to ensure taxpayers cannot claim a deduction against government assistance payments.
As previously announced, the Government will increase the amount of the Low Income Tax Offset (LITO) that is delivered through regular payments of salary and wages from 50% to 70% of their total entitlements (the remaining 30% is paid as a lump sum in the taxpayer’s tax return). The total LITO entitlement remains unchanged. Low income earners will effectively take home more each week though receive a smaller refund when they complete their tax return.
The Medicare levy low income thresholds will increase to $18,839 for individuals and $31,789 for families. The additional amount of threshold for each dependent child or student will also increase to $2,919. The Medicare levy threshold for single pensioners below Age Pension age will increase to $30,439.
Tax Changes – Businesses
The Government will replace the current rates that apply when using the statutory formula method to determine the taxable value of car fringe benefits with a single rate of 20% that will apply regardless of the distance travelled. The change directly targets salary sacrificed and employer provided vehicles.
Employees using the log-book method to determine business use will remain unchanged and this method will become much more attractive for employees who have a significant amount of work related travel.
As previously announced, the Government will enable small business to claim up to $5,000 as an immediate tax deduction for motor vehicles. The remainder of the motor vehicle value will be added to the general small business depreciation pool (depreciated at 15% in the first year and then 30%). This measure is in addition to the previously announced immediate write off for new business assets worth less than $5,000 from 2012/2013.
As announced in last year’s budget, the company tax rate will reduce to 29% from 1 July 2011 for small businesses.
The Entrepreneur’s Tax Offset (ETO), which was described in the budget as being poorly targeted and complex, will be abolished from 1 July 2012.
Changes to government allowances and benefits
Freeze indexation of Family Tax Benefits supplements for 3 years and freeze indexation of upper limits and thresholds of family payments for a further 2 years. This measure will not cut existing payments though will reduce the number of families eligible as wages naturally increase.
Changes to the age cut offs and interaction between Newstart and Youth Allowance to discourage those studying from ditching their course and collecting higher unemployment benefits when they turn 21.
Changes to the Family Tax Benefit A for dependent 16 to 19 year olds in full time secondary study (removing the need to choose between the FTB and Youth Allowance).
Deferred introduction of paid paternity leave by 6 months to 1 January 2013. No change to the current Paid Parental Leave Scheme which commenced on 1 January 2011.
Limit Family Tax Benefit Part A to children under 21.
Increased audits of new disability support pension claims and the bringing forward of new and stricter assessment criteria. There are currently 800,000 Australians receiving disability support payments.
Allow disability support pensioners to work up to 30 hours per week and remain eligible for disability support benefits.
Introduce participation requirements for recipients on the disability pension who are under the age of 35 with capacity to work more than 8 hours per week, whereby recipients must demonstrate that they are seeking work. Manifestly disabled persons able to work only 8 hours or less per week will not be effected. • Compulsory participation in work or study for teenage parents (once child turns 6 months). Pilot programs in 10 targeted areas (including Shellharbour).
Incentives for single parents to join the workforce by adjusting the income test for government payments.
Requirement for the long term unemployed i.e. those who have been without work for more than two years, to do 11 months of work-for the-dole (currently 6 months) or lose their payments from 1 July 2112 onward.
Transitional activities for school leavers who leave before completing year 12.
Reduction in HECS scheme incentive to pay contribution up front from 20% to 10% from 1 January 2012.
Bonus on voluntary HECS payments to the ATO reduced from 10% to 5%.
Individuals who breach the concessional contributions cap by up to $10,000 can request that these excess contributions be refunded to them from their fund from 1 July 2011. This refund option will only apply to first time breaches.
Clarifying last year’s budget announcement, the Government will set the higher concessional superannuation contributions cap for eligible individuals aged 50 and over with total superannuation balances of less than $500,000 to $50,000 rather than the general concessional cap of $25,000.
In previous years, the Government halved the minimum pension payment amounts. From 1 July 2011, the Government will start phasing down the minimum pension drawdown relief back to pre-GFC levels. Minimum payment amounts for account based, allocated and market linked (term allocated) pensions will be reduced by 25% for 2011/2012 and will return to normal in 2012/2013.
The annual Self Managed Super Fund levy will rise from $150 to $180
Mental health will receive significant additional funding of $1.5 billion over 5 years and the establishment of a National Mental Health Commission.
Infrastructure projects will receive an additional $1 billion in 2011-12. The biggest NSW based project will be $750 million in extra funding to upgrade the Pacific Highway
An increase in the permanent migration target to 185,000 split between skilled migration places of 125,850 (the highest skilled migration target on record) and family allocations of 58,600.
Border protection costs, including the recent asylum seekers deal with Malaysia, will be $1.1 billion in 2011-12.
A $715 million skills package which aims to place industry at the heart of the training system. Industry will be expected to match government funding. The first sectors planned for the new system will be aged care and construction.
Defense spending will be curtailed significantly due to efficiencies and deferrals or purchases. Savings in the 2011-12 financial year are expected to be $2.4 billion.
The top 10% of teachers will receive bonuses of 10% of their income from 2014 onward.
The planned tax break for ‘green buildings’ that was to take effect from 1 July 2012 has been deferred by 12 months. This scheme proposed to offer businesses that invest in eligible assets or capital works to improve the energy efficiency of their existing buildings a one-off bonus tax deduction of 50 per cent for the cost of those improvements
‘Phoenix’ companies or new companies set up to trade in the same or similar manner as a former insolvent company, will be targeted by new measures in this budget. The director penalty regime will extend to superannuation guarantee payments making directors personally liable to pay employee super. The ATO will be given additional powers to commence recovery action against suspected phoenix company directors and, in some circumstances, company directors will be prevented from claiming PAYG withholding credits in their personal tax return.